Method of and system for protecting an initial investment value of an investment

ABSTRACT

A method of protecting at least a portion of an initial investment value of an investment made by one or more investors, comprising the steps of: (a) determining using an option-based instrument calculator: (i) a first value of a first set of put option-based instruments at initial investment in the first set of put option-based instruments, the first set of put option-based instruments having a first underlying reference; (ii) a second value of a first set of call option-based instruments at initial investment in the first set of call option-based instruments, the first set of call option-based instruments having a second underlying reference, the first underlying reference being the same as or substantially correlated to the second underlying reference; and (iii) a third value of a second set of option-based instruments at initial investment in the second set of option-based instruments, the second set of option-based instruments having a third underlying reference; so that the sum of the first value, the second value, and the third value is less than the initial investment value; (b) holding positions using a regulated investment company in the first set of put option-based instruments, the first set of call option-based instruments, and the second set of option-based instruments, so that the first set of put option-based instruments and the first set of call option-based instruments provide the at least a portion of the initial investment value at maturity of the investment; and (c) making available the at least a portion of the initial investment value to the one or more investors upon the maturity of the investment.

RELATED APPLICATIONS

This application is a continuation of U.S. patent application Ser. No.11/851,292 filed on Sep. 6, 2007, entitled Method Of Protecting AnInitial Investment Value Of An Investment; which is acontinuation-in-part of U.S. patent application Ser. No. 11/847,167,filed on Aug. 29, 2007, entitled Method Of Protecting An InitialInvestment Value Of An Investment, the contents of which areincorporated by reference herein.

FIELD OF THE INVENTION

The present invention generally relates to systems and methods forensuring a return on an investment, and in particular to systems andmethods for protecting an initial investment value of an investment.

BACKGROUND OF THE INVENTION

As a means to make a financial product more attractive to customers, afinancial institution may offer the financial product with someprincipal protection. Ideally, the financial product is offered with100% principal protection. However, principal protection comes at a costto the financial institution, since with such products the financialinstitution bears the risk of the principal falling in value. Uponmaturity of a principal protected financial product, if the product isvalued below the initial investment amount, the financial institutionwould be burdened with providing the difference to the seller.

Accordingly, there is a need for a method of providing a principalprotected financial product that allows a financial institution offeringthe product to hedge the risk involved with guaranteeing the return ofprincipal.

SUMMARY OF THE INVENTION

A method of protecting at least a portion of an initial investment valueof an investment made by an investor according to an exemplaryembodiment of the present invention comprises the steps of: providing abusiness entity; electing the business entity to be treated as aregulated investment company; holding positions using the businessentity in a set of put-option based instruments having a firstunderlying reference and a set of call-option based instruments having asecond underlying reference, the first underlying reference being thesame as or substantially correlated to the second underlying reference,so that the sets of put-option based instruments and call-option basedinstruments provide the at least a portion of the initial investmentvalue at maturity of the investment; and making available the at least aportion of the initial investment value to the investor upon thematurity of the investment.

A method of protecting at least a portion of an initial investment valueof an investment made by an investor according to an exemplaryembodiment of the present invention comprises the steps of: providing abusiness entity; electing the business entity to be treated as aregulated investment company; holding positions using the businessentity in a first set of option-based instruments having a firstunderlying reference and a second set of option-based instruments havinga second underlying reference, the first underlying reference being thesame as or substantially correlated to the second underlying reference,so that the first set of option-based instruments and the second set ofoption-based instruments provide the at least a portion of the initialinvestment value at maturity of the investment; and making available theat least a portion of the initial investment value to the investor uponthe maturity of the investment.

According to an exemplary embodiment of the present invention, acomputer system for protecting at least a portion of an initialinvestment value of an investment made by an investor in a financialproduct offered by a business entity elected to be treated as aregulated investment company comprises: a memory that stores datarelating to the investment; a computer-readable medium comprising: anoption-based instrument calculator that determines values of a set ofput-based option instruments having a first underlying reference and aset of call-based option instruments having a second underlyingreference, the first underlying reference being the same as orsubstantially correlated to the second underlying reference; a hedgingmanager that generates a first set of instruction for holding positionsusing the business entity in the sets of put-based option instrumentsand call-based option instruments based on the values determined by theoption-based instrument calculator, so that the sets of put-based optioninstruments and call-based option instruments provide the at least aportion of the initial investment value at maturity of the investment;and a processor that executes the first and second set of instructions.

According to an exemplary embodiment of the present invention, acomputer readable medium has instructions executable on a computerprocessor for performing a method for protecting at least a portion ofan initial investment value of an investment made by an investor, wherethe method comprises the steps of: providing a business entity; electingthe business entity to be treated as a regulated investment company;holding positions using the business entity in a set of put-option basedinstruments having a first underlying reference and a set of call-optionbased instruments having a second underlying reference, the firstunderlying reference being the same as or substantially correlated tothe second underlying reference, so that the sets of put-option basedinstruments and call-option based instruments provide the at least aportion of the initial investment value at maturity of the investment;and making available the at least a portion of the initial investmentvalue to the investor upon the maturity of the investment.

In at least one embodiment, the regulated investment company is of atype selected from the following list of regulated investment companytypes: unit investment trust, close-ended fund and open-ended fund.

In at least one embodiment, the set of put-option based instruments andthe set of call-option based instruments comprise at least one optioninstrument.

In at least one embodiment, the call-option based instruments are issuedby the same entity as the put-option based instruments.

In at least one embodiment, the call-option based instruments are issuedby an entity that is different from an entity that issues the put-optionbased instruments.

In at least one embodiment, the calls and puts are each of a typeselected from the following list of call and put types: registeredwarrants, over-the-counter options, exchange traded options, forwardcontracts, exchange traded market-linked notes, publicly registeredmarket-linked notes, other types of market-linked notes, exemptsecurities, certificates of deposit, and private placement instruments.

In at least one embodiment, the business entity holds a diverse set ofstocks and securities.

In at least one embodiment, the diverse set of stocks and securities areheld in the form of options or a financial instrument the value of whichvaries based on an index calculated based on the diverse set of stocksand securities.

In at least one embodiment, the business entity holds a long position inthe set of put-option based instruments and a long position in the setof call-option based instruments.

In at least one embodiment, the business entity holds a short positionin the set of put-option based instruments and a short position in theset of call-option based instruments.

In at least one embodiment, the business entity holds a long position inthe set of put-option based instruments and a short position in the setof call-option based instruments.

In at least one embodiment, the business entity holds a short positionin the set of put-option based instruments and a long position in theset of call-option based instruments.

In at least one embodiment, the first and second sets of option-basedinstruments are made up of call-option based instruments, put-optionbased instruments, or combinations of call-option based instruments andput-option based instruments.

In at least one embodiment, the positions are long positions, shortpositions, or combinations of long and short positions.

In at least one embodiment, the at least a portion of the initialinvestment value is at least 50% of the initial investment value.

In at least one embodiment, the set of option based instruments has atotal notional amount of at least 50% of the at least a portion of theinitial investment value.

These and other features of this invention are described in, or areapparent from, the following detailed description of various exemplaryembodiments of this invention.

BRIEF DESCRIPTION OF THE DRAWINGS

Various exemplary embodiments of this invention will be described indetail, with reference to the following figures, wherein:

FIG. 1 is a flowchart showing a method of protecting an initialinvestment value of an investment according to an exemplary embodimentof the present invention; and

FIG. 2 is a block diagram of a system for protecting an initialinvestment value of an investment according to an exemplary embodimentof the present invention.

DETAILED DESCRIPTION OF PREFERRED EMBODIMENTS

By using sets of put-option based instruments and call-option basedinstruments, the present invention is able to protect an initialinvestment value while also potentially taking advantage of thepotential long-term capital gain treatment provided by optioninstruments. In particular, according to the present invention, abusiness entity is elected to be treated as a regulated investmentcorporation (RIC), and positions in sets of put and call-option basedinstruments are held by the RIC to protect at least a portion of theinitial investment. In order for a business entity to qualify as a RIC,the business entity must meet certain requirements as provided underFederal law and known in the art, such as 90% minimum distribution ofinterest and dividends received on investments less expenses, 90%distribution of capital gain net income and holding of a diverse set ofstocks and securities. Preferably, the sets of put and call-option basedinstruments have underlying references that are the same as orsubstantially correlated to one another. For the purposes of the presentdisclosure, the term “put-option based instrument” may be defined as afinancial instrument having a key attribute that is substantiallysimilar to a put option. Similarly, the term “call-option basedinstrument” may be defined as a financial instrument having a keyattribute that is substantially similar to a call option. As an example,a put-option based instrument according to the present invention may bemade up of a combination of put options and call options, with theaggregate effect of the instrument having significantly similareconomics to those of a put option. Similarly, a call-option basedinstrument according to the present invention may be made up of acombination of put options and call options, with the aggregate effectof the instrument having significantly similar economics to those of acall option.

FIG. 1 is a flowchart showing a method, generally designated byreference number 10, of protecting an initial investment value of aninvestment according to an exemplary embodiment of the presentinvention. In step S02 of the method 10, an investment managementcompany is provided as a C-corporation or some other form of businessentity capable of being registered as a RIC. For example, the businessentity may be in the form of a trust.

In step S04 of the method 10, the investment management company iselected to be treated as a RIC. The RIC is then preferably made toconstitute a unit investment trust (UIT), close-ended fund or anopen-ended fund offering a portfolio of stocks and securities toinvestors. For example, the RIC may offer as a reference asset a basketof stocks/and or securities held in the form of options or an indexcalculated based on the stocks and securities. As a further example, thereference asset may be a basket made up of weighted equity indices, suchas the S&P 500® Index, Dow Jones EURO STOXX 50® Index, the Nikkei 225™Index, the S&P/ASX 200 Index, the FTSE/Xinhua China 25™ Index, and theMSCI Taiwan Index, to name a few.

In step S06 of the method 10, the RIC enters into hedging transactionsin order to hedge some or all of its exposure and to protect at least aportion of the principal investment, and preferably all of the principalinvestment. In this regard, the RIC may take or modify positions in aset of put-option based instruments having a first underlying referenceand a set of call-option based instruments having a second underlyingreference. Preferably, the first underlying reference is the same as orsubstantially correlated to the second underlying reference. Forexample, the underlying reference may be the reference asset offered bythe RIC, substantially correlated to the reference asset, or unrelatedto the reference asset. In an exemplary embodiment of the presentinvention, at least 50% of the initial investment value is protected byholding positions in option-based instruments having a total notionalamount equal to at least 50% of the protected amount of the initialinvestment value.

The put-option and call-option based instruments in which the RIC holdspositions may be based on any known call or put types, such as, forexample, registered warrants, over-the-counter options, exchange tradedoptions, forward contracts, exchange traded market-linked notes,publicly registered market-linked notes, other types of market-linkednotes, exempt securities (i.e., securities that are exempt fromregistration under the Federal securities law), certificates of deposit,and private placement instruments, to name a few. Also, the calls andputs may have the same issuer or different issuers from one another.

The RIC may hold any variation of long and short positions in theput-option and call-option based instruments. For example, the RIC mayhold a long position in the set of put-option based instruments, a shortposition in the set of put-option based instruments, a long position inthe set of call-option based instruments, or a short position in the setof call-option based instruments. Further, each option-based instrumentmay be constructed by combining long and/or short positions of callsand/or puts, where the combination is selected to achieve the desiredaggregate effect of the option-based instrument. Some examples ofpositions which may be held by the RIC are provided below:

Example 1

The RIC purchases a call option on Underlying Reference (e.g., the S&P500 Index), and also purchases a put option on Underlying Reference A oron an underlying reference substantially correlated to UnderlyingReference A. If the underlying reference is a broad-based index, such asthe S&P 500 Index, the diversification requirement of RICs are met.

Example 2

The RIC purchases Basket B, which is a basket of stocks or securities.The RIC then: (i) purchases a put option on Basket B or on an underlyingreference substantially correlated to Basket B (e.g., an UnderlyingReference C); (ii) sells a call option on Basket B or on an underlyingreference substantially correlated to Basket B (e.g., an UnderlyingReference C or another substantially correlated index); and (iii) buys acall option on Underlying Reference D, an underlying referencesubstantially correlated to Basket B, or on an Underlying Reference E,which is not the same as or substantially correlated to Basket B.

Example 3

The RIC purchases Basket B, which is a basket of stocks or securities.The RIC then sells a forward contract on Basket B or on an underlyingreference substantially correlated to Basket B, and purchases a calloption on Basket B, or on an underlying reference substantiallycorrelated to Basket B, or on Underlying Reference E, which is not thesame as or substantially correlated to Basket B.

Example 4

The RIC purchases Basket B, which is a basket of stocks or securities.The RIC then sells a call option on Basket B or on an underlyingreference substantially correlated to Basket B, and purchases a calloption on Underlying Reference C, an underlying reference substantiallycorrelated to Basket B, or on Underlying Reference E, which is not thesame as or substantially correlated to Basket B.

Example 5

The RIC: (i) purchases a first call option on Underlying Reference C;(ii) sells a second call option with a higher strike price than thefirst call option on Underlying Reference C or on an underlyingreference substantially correlated to the Underlying Reference C; (iii)sells a put option on Underlying Reference C or on an underlyingreference substantially correlated to Underlying Reference C; and (iv)purchases a third call option on Underlying Reference D, an underlyingreference substantially correlated to Underlying Reference C, or onUnderlying Reference E that is not the same as or substantiallycorrelated to Underlying Reference C.

Example 6

The RIC purchases a Financial Instrument A and a Financial Instrument B,where Financial Instrument A has the economics of (I) plus (II) plus(III), and Financial Instrument B has the economics of (i) plus (ii),where:

(I) is a long position of a call option on Underlying Reference C;

(II) is a short position of a call option on Underlying Reference C oron an underlying reference substantially correlated to UnderlyingReference C;

(III) is a long position of a call option on Underlying Reference C oron an underlying reference substantially correlated to UnderlyingReference C or on Underlying Reference D that is not the same as orsubstantially correlated to Underlying Reference C;

(i) is a long position of a put option on Underlying Reference C or onan underlying reference substantially correlated to Underlying ReferenceC; and

(ii) is a short position on Underlying Reference C or on an underlyingreference substantially correlated to Underlying Reference C.

Example 7

The RIC purchases a Financial Instrument A and a Financial Instrument B,where Financial Instrument A has the economics of (I) plus (II) plus(III), and Financial Instrument B has the economics of (i) plus (ii),where:

(I) is a long position of a call option on Underlying Reference C;

(II) is a short position of a call option on Underlying Reference C oron an underlying reference substantially correlated to UnderlyingReference C;

(III) is a long position of a put option on Underlying Reference C or onan underlying reference substantially correlated to Underlying ReferenceC or on Underlying Reference D that is not the same as or substantiallycorrelated to Underlying Reference C;

(i) is a long position of a put option on Underlying Reference C or onan underlying reference substantially correlated to Underlying ReferenceC;

(ii) is a short position on Underlying Reference C or on an underlyingreference substantially correlated to Underlying Reference C.

In step S08 of the method 10, the RIC makes available to the investor atleast some portion of the invested principal, and preferably at least100% of the invested principal. Additional funds may also be madeavailable to the investor depending on the overall performance of theinvestment.

The above-described method provides a mechanism by which an investmentmanagement company or similar entity in the form of an RIC may guaranteereturn of a principal amount of an investment to the investor, withoutsubstantial risk to the investment management company. As part of anagreement between the RIC and the investor, such guarantee of return ofthe principal amount may apply only if the investor maintains theinvestment to maturity.

FIG. 2 is a block diagram of a system, generally designated by referencenumber 100, for protecting an initial investment value of an investmentaccording to an exemplary embodiment of the present invention. Thesystem 100 includes an RIC hedging manager 120, one or more investors130, and an option-based instrument value calculator 140. Although onlythree investor are shown in FIG. 2, it should be appreciated that anynumber of investors may be involved in the system 100, and further theinvestors 130 may be individual or corporate entities.

The option-based instrument value calculator 140 determines the valuesof option-based instruments that are used by the RIC to hedge the riskassociated with guaranteeing return of a least a portion of the value ofthe initial investment made by the investors 130. Based on the valuesdetermined by the option-based instrument value calculator 140, the RIChedging manager 120 may determine the appropriate sets of put-option andcall-option based instruments in which to hold positions so as toachieve protection of at least a portion of the initial investmentvalue. For example, the RIC hedging manager 120 may determine whether tohold long and/or short positions in an appropriate amount ofoption-based instruments and the terms of each option-based instrumentto achieve the desired result. In this regard, as discussed above, theRIC hedging manager 120 may take long positions, short positions, orcombinations of short and long positions in sets of put-option and/orcall-option based instruments. Also, as discussed above, the put-optionand call-option based instruments in which the RIC holds positions maybe based on any known call or put types, such as, for example,registered warrants, over-the-counter options, exchange traded options,forward contracts, exchange traded market-linked notes, publiclyregistered market-linked notes, other types of market-linked notes,exempt securities (i.e., securities that are exempt from registrationunder the Federal securities law), certificates of deposit, and privateplacement instruments. Also, the calls and puts may have the same issueror different issuers from one another, and may have the same,substantially correlated or different underlying references.

The RIC hedging manager 120 may use an algorithm that optimizes hedgingwhile protecting at least a portion of the initial investment. Such analgorithm may be based on Formula 1 below:Value of Protected Portion of Initial Investment=Fees Paid byInvestor+Value of Option-Based Instruments  (1)In exemplary embodiments of the invention in which combinations ofdifferent types of option-based instruments are used, the algorithm maybe based on Formula 2 below:Value of Protected Portion of Initial Investment=Fee Paid byInvestor+Value of Call-Option Based Instruments+Value of Put-OptionBased Instruments  (2)

While this invention has been described in conjunction with theexemplary embodiments outlined above, it is evident that manyalternatives, modifications and variations will be apparent to thoseskilled in the art. Accordingly, the exemplary embodiments of theinvention, as set forth above, are intended to be illustrative, notlimiting. Various changes may be made without departing from the spiritand scope of the invention.

1. A method of protecting at least a portion of an initial investmentvalue of an investment made by one or more investors, comprising thesteps of: (a) determining using an option-based instrument calculator:(i) a first value of a first set of put option-based instruments atinitial investment in the first set of put option-based instruments, thefirst set of put option-based instruments having a first underlyingreference; (ii) a second value of a first set of call option-basedinstruments at initial investment in the first set of call option-basedinstruments, the first set of call option-based instruments having asecond underlying reference, the first underlying reference being thesame as or substantially correlated to the second underlying reference;and (iii) a third value of a second set of option-based instruments atinitial investment in the second set of option-based instruments, thesecond set of option-based instruments having a third underlyingreference; so that the sum of the first value, the second value, and thethird value is less than the initial investment value; (b) holdingpositions using a regulated investment company in the first set of putoption-based instruments, the first set of call option-basedinstruments, and the second set of option-based instruments, so that thefirst set of put option-based instruments and the first set of calloption-based instruments provide the at least a portion of the initialinvestment value at maturity of the investment; and (c) making availablethe at least a portion of the initial investment value to the one ormore investors upon the maturity of the investment.
 2. The method ofclaim 1, wherein the regulated investment company is of a type selectedfrom the following list of regulated investment company types: unitinvestment trust, close-ended fund and open-ended fund.
 3. The method ofclaim 1, wherein the first set of put option-based instruments and thesecond set of option-based instruments are issued by the same entity. 4.The method of claim 1, wherein the first set of call option-basedinstruments and the second set of option-based instruments are issued bythe same entity.
 5. The method of claim 1, wherein the first set of calloption-based instruments are issued by an entity that is different froman entity that issues the first set of put option-based instruments. 6.The method of claim 1, wherein the first set of call option-basedinstruments are issued by an entity that is different from an entitythat issues the second set of option-based instruments.
 7. The method ofclaim 1, wherein the first set of put option-based instruments areissued by an entity that is different from an entity that issues thesecond set of option-based instruments.
 8. The method of claim 1,wherein the calls and puts are each of a type selected from thefollowing list of call and put types: registered warrants,over-the-counter options, exchange traded options, forward contracts,exchange traded market-linked notes, publicly registered market-linkednotes, other types of market-linked notes, exempt securities,certificates of deposit, and private placement instruments.
 9. Themethod of claim 1, wherein the regulated investment company holds adiverse set of stocks and securities.
 10. The method of claim 9, whereinthe diverse set of stocks and securities are held in the form of optionsor a financial instrument the value of which varies based on an indexcalculated based on the diverse set of stocks and securities.
 11. Themethod of claim 1, wherein the regulated investment company holds a longposition in the first set of put option-based instruments and a longposition in the first set of call option-based instruments.
 12. Themethod of claim 1, wherein the regulated investment company holds ashort position in the first set of put option-based instruments and ashort position in the first set of call option-based instruments. 13.The method of claim 1, wherein the regulated investment company holds along position in the first set of put option-based instruments and ashort position in the first set of call option-based instruments. 14.The method of claim 1, wherein the regulated investment company holds ashort position in the first set of put option-based instruments and along position in the first set of call option-based instruments.
 15. Acomputer system for protecting at least a portion of an initialinvestment value of an investment made by an investor in a financialproduct offered by a regulated investment company comprising: (a) aprocessor; (b) a computer-readable storage medium that stores datarelating to the investment which is operatively connected to theprocessor; (c) an option-based instrument calculator that determinesvalues of: (i) a first value of a first set of put option-basedinstruments at initial investment in the first set of put option-basedinstruments, the first set of put option-based instruments having afirst underlying reference; (ii) a second value of a first set of calloption-based instruments at initial investment in the first set of calloption-based instruments, the first set of call option-based instrumentshaving a second underlying reference, the first underlying referencebeing the same as or substantially correlated to the second underlyingreference; and (iii) a third value of a second set of option-basedinstruments at initial investment in the second set of option-basedinstruments, the second set of option-based instruments having a thirdunderlying reference; so that the sum of the first value, the secondvalue, and the third value is less than the initial investment value;and (d) a hedging manager that generates a set of instructions to beexecuted on the processor for holding positions using the regulatedinvestment company in the first set of put option-based instruments, thefirst set of call option-based instruments and the second set ofoption-based instruments, so that the first set of put option-basedinstruments and the first set of call option-based instruments providethe at least a portion of the initial investment value at maturity ofthe investment.
 16. An apparatus comprising: (a) a processor; (b) acomputer-readable storage medium that stores data relating to aninvestment, the computer-readable storage medium operatively connectedto the processor, wherein the data comprises: (i) a first value of afirst set of put option-based instruments at initial investment in thefirst set of put option-based instruments, the first set of putoption-based instruments having a first underlying reference; (ii) asecond value of a first set of call option-based instruments at initialinvestment in the first set of call option-based instruments, the firstset of call option-based instruments having a second underlyingreference, the first underlying reference being the same as orsubstantially correlated to the second underlying reference; and (iii) athird value of a second set of option-based instruments at initialinvestment in the second set of option-based instruments, the second setof option-based instruments having a third underlying reference; whereinthe sum of the first value, the second value, and the third value isless than an initial investment value; and (iv) positions held by aregulated investment company in the first set of call option-basedinstruments, the first set of put option-based instruments and thesecond set of option-based instruments, so that the first set of putoption-based instruments and the first set of call option-basedinstruments provide at least a portion of the initial investment valueat maturity of the investment.